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OCTOBER, 2006 Continuing Care Retirement Communities, State Regulation and the Growing Importance of Counsel for Residents and their Families By KATHERINE C. PEARSON* Professor of Law The Dickinson School of Law of The Pennsylvania State University TABLE OF CONTENTS Page INTRODUCTION REGULATION OF CCRCs AND LCCs Pennsylvania s Approach to Regulation Licensure Disclosures Financial Accountability Contract Terms Residents Right of Organization Liability of CCRC Provider for Misrepresentation or Other Misconduct Regulation in States other than Pennsylvania EFFECT OF FEDERAL DEFICIT REDUCTION ACT ON CCRC PLANNING LOOKING TO THE FUTURE OF CCRCs: IS CURRENT REGULATION ADEQUATE TO PROTECT RESIDENTS? CONCLUSION INTRODUCTION Older persons and their families report a wide range of satisfaction about their experiences with Continuing Care Retirement Communities ( CCRCs ), also known as Living Care or Life Care Communities ( LLCs ). 1 This range in satisfaction demonstrates a need for experienced lawyers who are prepared to assist clients in understanding the resident s rights and financial commitment, as well as the limits of the community s legal obligation to provide a full spectrum of long-term care: I wish I had moved into [this community] five years earlier, as soon as my wife s health became more fragile. It was expensive, but we looked carefully at our options, knew what we were getting into, and this was the best choice for my wife and me and it saved our children the burden of trying to care for us. Resident in South Central Pennsylvania. If I had known how secretive and insensitive to residents cares and concerns the administration and board [of this community are], I believe I would not have come to [this CCRC]. Resident in North Central Pennsylvania Our father barely qualified for [the CCRC closest to his home town in Florida], and he had to pledge every dime of his savings in order to get accepted. But when he ended up spending his money for health care more quickly than he had anticipated, we were suddenly faced with the question of what * Copyright 2006, Katherine C. Pearson. 1 The genesis for this article was a series of inquiries by applicants and residents of CCRCs made to the Elder Law and Consumer Protection Clinic at the Penn State Dickinson School of Law. My special thanks to Dale Tice, a May 2006 graduate of Penn State Dickinson, who provided invaluable assistance in researching CCRC issues, and to Jared Childers, Class of 2008, for his excellent research and editorial work. Gordon M. Wase, Esq., and I used an early outline of this article to present The ABCs of CCRCs at the 9th Annual Elder Law Institute hosted by the Pennsylvania Bar Institute in July I am indebted to Gordon, who greatly helped me in understanding Pennsylvania s approach, drawing upon his own background in financial services industries, including financing of CCRC start-ups. 172 THE ABC S OF CONTINUING CARE RETIREMENT COMMUNITIES 173 happens now? Does he have to move out? He s not ready for a nursing home and the facility doesn t accept Medicaid. Adult Daughter in Pennsylvania, whose father is in his third year of assisted living at a CCRC in northern Florida I m nervous about asking [the marketing person] a lot of questions before my [parent] is accepted. I m afraid that if we ask too many questions, the [CCRC] won t accept [my parent] as a resident and that s really the only option in our home town. But at the same time, [my siblings and I] really don t understand parts of the contract and some terms seem ambiguous, especially with regard to the different options for repayment of a percentage of the entrance fees. Adult child in Pennsylvania, whose elderly parent is considering a CCRC in central California The notion of life-time care for the aged, tied to a single, up-front fee is not new. 2 CCRCs, however, are a relatively recent incarnation, with most of their growth coming in the last twenty years. 3 Their popularity among older adults stems from several factors, including flexibility in living arrangements, the comparative certainty of what will happen as care needs change, and the ability to stay in one familiar location. The price tag for CCRC living can be high but often the amenities provided are top-of-the-line. Recently the CCRC label has gained in popularity with prospective operators in Pennsylvania. Following recent changes in qualification for federal matching funds under the 2 See, e.g., In re Maull s Estate, 40 A (Pa. 1898) (holding a resident s promise to transfer all assets to the Presbyterian Home for Aged Couples to be unenforceable, where the resident died without transferring his assets, instead leaving all assets to other individuals and charities under his will). See generally Robert Brazener, Validity and Construc-tion of Contract Under Which Application for Admission to Home for Aged or Infirm Turns Over His Property in Return For Lifetime Care, 44 A.L.R. 3d 1174 (2006). 3 For an overview of senior care housing alternatives, including CCRCs, see Robert G.Schwemm & Michael Allen, For the Rest of Their Lives: Seniors and the Fair Housing Act, 90 IOWA L. REV. 121 (Oct. 2004). For more of the history of CCRCs, see Nancy A. Peterman, Robert W. Lannan & John T. Gregg, Protecting Residents of Continuing Care Retirement Communities, 22 AM. BANK. INST. JOURNAL 18 (Mar. 2003); Michael D. Floyd, Should Government Regulate the Financial Management of Continuing Care Retirement Communities?, 1 ELDER LAW JOURNAL 29 (1993). Medicaid program, 4 Pennsylvania began assessing nursing homes a charge of $15 per bed per day. 5 In contrast, the same bed in a nursing care wing of a CCRC is assesed less than $2 per bed per day, although a CCRC s wing may also qualify for Medicaid payments. 6 The substantial difference in taxation has not been lost on nursing home operators. 7 The Pennsylvania Department of Insurance s records indicate that where there were three to four CCRC applications per year in previous years, during the last 24 months there have been more than 40 new applications for CCRC licensure, with most applications coming from existing nursing home operations. 8 To qualify 4 See 42 C.F.R (2006) (regarding permissible health care-related taxes after transition period). 5 See Department of Public Welfare s Nursing Facility Assessment Program for Fiscal Year , at 35 Pa. Bull. 6845, providing that for FY , the assessment rate for nonexempt nursing facilities that participate within a licensed CCRC or that have 50 licensed beds or less will be... $1.54 per non-medicare resident day while the assessment rate for all other non exempt nursing facilities will be $15.95 per non-medicare resident day. For FY , the rates for CCRC increase to $1.97 per bed, while the nursing home rate increases to $20.35 per day. See 36 Pa. Bull See also 62 P.S. 801-A through 815-A.3. 6 The annual assessment rates must be sufficient to generate at least $50 million in additional revenues, subject to the maximum aggregates assessment amount that qualifies for Federal matching funds. 36 Pa. Bull The Department of Public Welfare estimates that the annual aggregate assessment fees for nonexempt nursing facilities will total $339,839,170 in FY Id. The assessment fees and the associated matching federal funds are to be used to make payment to qualified Medical Assistance nursing facility providers. Id. 7 Several nursing homes objected to the proposed assessment structure. See 35 Pa. Bull Penn-sylvania attorney Stephen Feldman reports at least one nursing home has initiated a court challenge to its higher assessment. from Stephen A. Feldman, Esq. to author (September 30, 2006) (on file with author). 8 Based on the author s review of public records on CCRC applications and disclosure statements at the Pennsylvania Department of Insurance in July, The numbers used here are admittedly rough counts, but even the rough numbers suggest the need for comprehensive state statistical information and follow-up. See text accompanying notes , infra. 174 PENNSYLVANIA BAR ASSOCIATION QUARTERLY rapidly, existing nursing homes often seek affiliation with an existing continuing care community. 9 Even before the increase in popularity, there were potential legal issues, often tied to significant variation in financing and legal structures, as well as variation in the individual states regulations. Legal issues typically arise from one of several variables in CCRC structures, including: The pricing structure for admission; The pricing structure for on-going services, including the potential for unpredictable or unaffordable increases; Any property ownership interest held by the resident; The quality and accessibility of care provided on-site for residents; The governance of the CCRC, including the impact on resident autonomy of changes in management companies or resident-member organizations; The legal structure of the CCRC ownership, including religious affiliations, nonprofit and for-profit entities, public or private ownership, and the financial stability of any parent corporation; and The extent of CCRC regulation and review provided by the state. The last point should be emphasized. In Pennsylvania, for example, state law places authority for regulation of CCRC contracting and financial practices with the Department of Insurance. 10 The primary focus of the Commonwealth s regulations is on public disclosure of items such as price and financing structure, leaving it up to the consumer to make choices. The Department does not appear to interpret the law as requiring the state to make an active assessment of the management practices or financial soundness of CCRCs individually or as an industry. 11 Other states have taken a more aggressive attitude 9 Id. 10 In addition to regulation of contracting and financial practices by the Pennsylvania Department of Insurance, CCRCs will be subject to regulation of various aspects of their assisted living and nursing facility operations by the Pennsylvania Departments of Health and Public Welfare. CCRCs also may adopt industry-standards, such as accreditation through the Joint Commission on Accreditation of Healthcare Organizations. See also CARF-CCRC Standards at note 13 infra. 11 Pennsylvania law requires the Insurance commissioner or his designee to visit each CCRC facility towards state oversight of CCRC financial practices. 12 The label of continuing care retirement community can be misleading, especially if assumptions are made about the scope of services available to residents. There are several different CCRC formats recognized by the industry itself, 13 including extensive agreements, defined as providing housing, residential services, and unlimited health-related services, usually for a initial, fee (sometimes with periodic, inflation adjustments); modified agreements, providing housing, residential services and a specified amount or type of health-related services for the initial fee, with additional services available for additional fees, and fee-for-service agreements, that provide housing and residential services for a fee stated in the initial agreement, with access to health care offered at full fee-for-service rates. 14 The initial price depends on the facility s assessment of the applicants profile, usually based on age of the applicants, their health conditions, and the size or type of initial housing selected. Generally speaking, the highest initial cost is for housing tied to an extensive agreement, with lower initial prices for modified or fee-for-service agreements. However, the total cost of the financing agreement will depend on inflation, how long the residents live in the community and other factors which can be difficult to predict. Unfortunately, whether the community is offering an extensive, modified, fee-for-service arrangement or a hybrid is not easy to determine from a quick look at marketing materials, or even the contracts, thus making comparison between neighboring CCRCs more difficult. 15 to examine its books and records at least once every four years. 40 PA. CONS. STAT ( Audits ). However the financial statements need not be certified audited reports, id., and Pennsylvania s inquiry appears to be largely pro forma, at least in the absence of substantial complaints by applicants or residents. 12 See e.g., N.Y. PUBLIC HEALTH LAW 4602 (McKinney 2006) (creating a CCRC Council, with members from different agencies and the public, and giving the council broad powers of review and inquiry). 13 See Commission on Accreditation of Rehabilitation Facilities, including its accreditation standards for Continuing Care Retirement Communities, described at (hereafter referred to as CARF-CCRC Standards ). 14 Id. 15 Similar problems with lack of comparability have plagued other commercial products sold to older adults, such as Medigap insurance policies. THE ABC S OF CONTINUING CARE RETIREMENT COMMUNITIES 175 In addition, a major variable in the industry is whether the initial contract involves the resident s purchase of real estate or membership in the community, which can be similar to a condominium or cooperative purchase, thus triggering questions about how the resident s ownership interest will be sold or transferred after death or upon other reasons for leaving the community. 16 Conditions on the right of resale such as approval by the corporation of any new resident can also impact on the overall dollar value of the CCRC investment. Finally, despite the promises implied by the names for continuing care or life care communities, in most states CCRCs are not required by regulatory authorities to guarantee or otherwise promise to provide specific services as part of their package. While some CCRCs offer a full range of options including independent living, assisted living and skilled nursing care as the resident s needs changes, other CCRCs emphasize independent living units with communal services such as on-site dining, recreation and therapy, while offering a relationship with a nearby nursing home. Many communities do provide guarantees of all levels of care, usually tied to specific contractual conditions but generally speaking state law does not require such guarantees as a prerequisite for the use of tempting marketing labels. With such enormous variation comes the need for carefully considered, informed decision making by prospective residents and their families; in turn, attorneys with experience in reviewing CCRC contracts can play an important role. As Pennsylvania s Department of Insurance website on CCRCs advises consumers, The disclosure statement and resident s agreement are important documents that you should read carefully. You may wish to review these documents with your attorney or other advisor. 17 One response has been to require standardization and labeling of similar policies. See e.g., Choosing a Medigap Policy: A Guide to Health Insurance for People With Medicare, published by the Center for Medicare and Medicaid Services (describing policies by lettered designations). Compare Richard L. Kaplan, Cracking the Conundrum: Toward a Rational Financing of Long-Term Care, 2004 U. ILL. L. REV. 47 (advocating standardization of long term care insurance policies to facilitate consumer comparisons). 16 Id. 17 See Pennsylvania Department of Insurance, Consumer Information on CCRCs, Facility Disclosure Information, at REGULATION OF CCRCS AND LLCS As of September 2005, thirty-four states had enacted some form of legislation regulating CCRCs. 18 While there is substantial variation among the regulatory approaches, common themes do exist. Many states have regulations affecting concepts such as licensure, mandatory disclosures, financial accountability, mandatory contract terms, advertising restrictions and resident rights. 19 The primary focus of most states financial regulations is (a) protection of any pre-paid entrance fees including refund policies and (b) mandating standard accounting practices for reporting of operating and investment capital for the facility as a whole. Some states require that all or a portion of a resident s entrance fee be placed in escrow to ensure that a refund will be available under specific conditions and many states require a cash reserve in an attempt to assure the ability of the facility to provide services. Most states also have special provisions for state oversight of insolvent or struggling facilities. Pennsylvania s Approach to Regulation Licensure The modern era for CCRCs can be traced to the mid-1980s, when the CCRC industry established its own accreditation program 20 and many states, including Pennsylvania, adopted specific regulations. In 1984, the Pennsylvania legislature enacted the Continuing-Care Provider Registration and Disclosure Act, found at 40 PA. CONS. STAT et seq., with regulations at Title 31, Chapter 151, of the Pennsylvania code, 31 PA. CODE et seq. By the mid-80 s, high-profile bankruptcies of CCRCs had occurred in at least ten states, 21 and Pennsylvania s response recognized that tragic consequences can result for seniors upon the insolvency of a provider. 22 The trigger for Pennsylvania s regulation is offering care, board, lodging, nursing or other health services for the life of the individual or for a period in excess of one year. 23 Providers must obtain a certificate of authority from the cwp/view.asp?a=1274&q= (last visited September 30, 2006). 18 JOAN M. KRAUSKOPF ET AL, 1ELDER LAW ADVOCACY FOR THE AGING (2d ed. 2005). 19 Id. 20 See CARF-CCRC Standards, supra note See e.g., KRAUSKOPF, ET AL., supra note 18, at 12:81 note PA. CONS. STAT PA. CONS. STAT (emphasis supplied). 176 PENNSYLVANIA BAR ASSOCIATION QUARTERLY Insurance Commissioner and the Department of Insurance has the primary regulatory role, as the investment in a CCRC is often deemed analogous to the purchase of life insurance or long-term care insurance. 24 As a result of the definition, a facility that calls itself a CCRC or life-care community is not, however, obligated by state law to provide life-time care or to provide specific levels of care. Rather, the terms of the contract will define the scope of the obligation. As of June of 2006, there were 147 active CCRC providers in Pennsylvania, operating 186 licensed facilities. 25 Disclosures At the time of or prior to the execution of a contract to provide continuing care, the provider is required to deliver to the prospective resident a disclosure statement 26 containing specific information about the organizers, their backgrounds and business experience, profit or non-profit status and any religious or charitable affiliation, and certain financial information about the proposed organization, including: The services provided under the continuing care contract, and other services available for an extra charge; A description of all fees, including tables showing the frequency and average amount of fee increases for the last five years; Provisions for the establishment of reserve funds or escrow accounts, including how these funds will be invested; Certified financial statements including a balance sheet and income statement for the previous two years; and Any other material information. 27 The provider is also required to file an annual disclosure statement containing the same information, with a revised pro forma income statement for the next fiscal year, with a description of any material differences between the actual operating results and the pro forma statement from the prior year. 28 The regulations further specify that annual disclosure statements must include information on all new or additional mortgages, liens, loan commitments, long-term financing arrangements or leases. The annual statement must be delivered to all current and prospective residents. No provider shall make any statement or representation which is untrue, deceptive, or misleading and further no provider shall file with the department or de
